Property swaps

QUESTION : Jack and Jill jointly own two investment properties and wish to swap their interests so that they each have ownership of one of the properties. As tenants in common they currently equally own Cornfield with a market value of £210,000 and the original cost of £50,000 and Wheatfield with a market value of £200,000 and the original cost of £49,000. Jack is to have Cornfield and Jill is to have Wheatfield. What are the CGT and SDLT implications?

ANSWER: For CGT there is a form of roll-over relief on the disposal of joint interests in land in s 248A TCGA 1992 where conditions A to E in that section is satisfied. Condition A is that there is a joint holding of land or separate holdings in land; condition B is that there is a disposal of an interest to one or more co-owners; condition C is that the consideration includes an interest in a joint holding in land; condition D is that in consequence of the disposals the co-owners become sole-owners and condition E is that the acquired interest is not an interest in excluded land. The excluded land is defined in s 248C TCGA 1992 as a dwelling-house which would attract private residence relief under ss 222-226 TCGA 1992 arising on its subsequent disposal within six years of acquisition or becomes excluded land within six years in which case any relief is then withdrawn.

In this example the conditions for relief are satisfied and the position for Jack is as follows:

Without the roll-over relief, his disposal of his half share of Wheatfield shows a gain of £80,500 (the half share of the market value acquired of £210,000 less the half share of Wheatfield disposed of amounting to £24,500).  On submitting a claim under s 248B(2) TCGA 1992 the gain is reduced to £5,000 being the excess of the consideration received over the market value of the relinquished interest.  The acquisition cost of the half-share acquired becomes £24,500 (the market value of the acquired interest less the gain on Wheatfield).  The chargeable gain of £5,000 is below the annual exempt amount in s 3 TCGA 1992 so if Jack has no other disposals in the year will not have to pay any CGT.

The position for Jill is as follows:

Jill acquires half of Wheatfield with a market value of £100,000 in exchange for her half share in Cornfield with a cost of £25,000 (half of £50,000) giving a gain of £75,000. With a claim for the roll-over relief under s 248B(1) TCGA 1992 there is no chargeable gain and the base cost of the half-share that Jill acquires in Wheatfield is £25,000. This is achieved by treating the disposal proceeds as being equal to the acquisition cost of the interest transferred and the base cost of the acquired half-share in Wheatfield becomes the market value of £100,000 less the gain rolled-over of £75,000, ie £25,000.

For SDLT the rules on partitions with joint owners going their separate ways are to be found in para 6 Sch 4 FA 2003 and for exchanges see para 5 Sch 4 FA 2003. The property interest given up by one party is not treated as consideration for the acquisition of the interest from the other party.

There is no definition of “partition” in the legislation and this was raised during the Standing Committee Debates on the Finance Bill 2003. The Chief Secretary to the Treasury clarified the definition in an example – “A and B are the joint owners of two properties. They agreed to split ownership, so that A is left as sole owner of one property and B is the sole owner of the other.”  The intention of relief for partitions in para 6 Sch 4 FA 2003 is to give full relief except to the extent that money is paid which is corroborated by the HMRC manual at SDLTM04030A.  Therefore, SDLT will not be due unless there is a balancing payment or other consideration given and in the case of Jack and Jill above that is not the case and, accordingly, no SDLT will be due.

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Declaring offshore income

HMRC is urging UK taxpayers to come forward and declare any foreign income or profits on offshore assets before 30 September to avoid higher tax penalties.

New legislation called ‘Requirement to Correct’ requires UK taxpayers to notify HMRC about any offshore tax liabilities relating to UK income tax, capital gains tax, or inheritance tax.

Some UK taxpayers may not realise they have a requirement to declare their overseas financial interests. Under the rules, actions like renting out a property abroad, transferring income and assets from one country to another, or even renting out a UK property when living abroad, could mean taxpayers face a tax bill in the UK.

From 1 October more than 100 countries, including the UK, will be able to exchange data on financial accounts under the Common Reporting Standard (CRS). CRS data will significantly enhance HMRC’s ability to detect offshore non-compliance and it is in taxpayers’ interests to correct any non-compliance before that data is received or be faced with higher penalties.

The most common reasons for declaring offshore tax liabilities are in relation to foreign property, investment income and moving money into the UK from abroad. Over 17,000 people have already contacted HMRC to notify them about tax due from sources of foreign income, such as their holiday homes and overseas properties.

HOW DO I NOTIFY HMRC?

Taxpayers can correct their tax liabilities by using HMRC’s digital disclosure service as part of the Worldwide Disclosure Facility

Once the taxpayer has notified HMRC by 30 September of their intention to make a declaration, they will then have 90 days to make a full disclosure and pay any tax owed.

 

June / July 2018 Important dates

Date What’s Due
1/06 Corporation tax for year to 31/8/17 (unless pay quarterly)
19/06 PAYE & NIC deductions, and CIS return and tax, for month to 5/6/18 (due 22/06 if you pay electronically)
1/07 Corporation tax for year to 30/9/17 (unless pay quarterly)
5/07 Last date for agreeing PAYE settlement agreements for 2017/18 employee benefits
5/07 Deadline for agents and tenants to submit returns of rent paid to non-resident landlords and tax deducted for 2017/18
06/07 Deadline for forms P11D and P11D(b) for 2017/18  tax year
19/07 PAYE & NIC deductions, and CIS return and tax, for month to 5/7/18 (due 22/07 if you pay electronically)
31/7 50% payment on account of 2018/19 tax liability due

TAKING A LODGER? DON’T FORGET TO CLAIM “RENT A ROOM” RELIEF

HMRC are carrying out a review of rent a room relief to discover whether the scheme, introduced back in 1992 provides the right incentives for the rental market. The current scheme exempts from tax, gross rents up to £7,500 where rooms within the taxpayer’s main residence are rented out.

Most accountants that responded to the call for evidence were keen for the relief to continue as it encourages taxpayers to let out spare rooms and provides them with additional income.

Note that where the gross rental income exceeds £7,500, say £12,000, the excess of £4,500 would be taxable. Alternatively the taxpayer may deduct costs of providing the living accommodation such as a proportion of mortgage interest and light and heat. If these allowable expenses amounted to £9,000 then it would be more appropriate to be taxed on the net rental profit of £3,000.

Note also that the current scheme only provides relief where the rooms let are in the taxpayer’s main residence and if the property is jointly owned, the relief would be £3,750 each. Where the lettings are in another property, the new £1,000 property allowance could be set against the gross rental income, however this allowance applies to each taxpayer.

Annual Tax on Enveloped Dwellings (ATED)

There are a number of changes which will impact the returns for the 2018-2019 period to cover the ATED year which runs from 1 April to 31 March.

Every dwelling owned by a non-natural person (a company, a partnership with a company member, or a collective investment scheme) at 31 March 2017 MUST be revalued at 1 April 2017. Therefore, a property that was valued at say, £400,000 in 2012 may have been outside of the scope until now, however, if the taxable value is more than £500,000 on 1 April 2017, or at acquisition if that was later than 1 April 2017, then it will be subject to ATED.

1 April 2017 brought about the first 5-yearly revaluation date for ATED and this revaluation will be needed for 2018-2019.  There are reliefs and a relief declaration return would be completed where applicable.

The ATED is calculated using a banding system.  The annual chargeable amount for 2018-2019 has also risen to £3,600 (up from £3,500) for dwellings ranging from £500,001 to £1m.

From 1 April 2018, all online ATED returns must be filed using HMRC’s new ATED digital service. The new online service before the 2018-19 filing window opens on 1 April 2018. The online service can be used for both chargeable returns and relief declaration returns.

It’s worth noting that a return must be filed by 30 April for that year if the property was held on 1 April.

Divorce and property

For example;  As part of the divorce settlement, it has been agreed that you will transfer your share of the marital home to your wife once she has raised the finance to buy you out. This might take long time, or you may have to sell the house.  How can this affect your PPR claim?

Normal PPR relief would allow you to relieve the gain on the sale of this property, which had been your residence, for the period that you actually lived there and the last 18 months for any other reason. Depending on when your ex-wife manages to raise the finance this later period of absence may well be covered by these basic rules.

However, TCGA 1992 s225B legislates for the right to receive PPR on disposals in connection with the end of a marriage or civil partnership, where a partner ceases to live with their spouse or civil partner in what was their only or main residence. This gives you some leeway in that you can still be classed as accruing, and so make a claim for, PPR on the ex-marital home that you no longer live in due to the separation. There are no time limits given in the legislation for how long this PPR can accrue but conditions have to be met.

One of the conditions is that your disposal is part of the agreement on dissolution or annulment of the marriage or civil partnership, where separation is likely to be permanent or by order of the court.

Another condition is that your previous partner must also have this property as their only or main residence from the period that you move out to when you transfer your interest to them. This is also a key point that sometimes gets missed when the house is put up for sale and sold to a third party. To enable this claim, if you do decide to put the house on the market, you must transfer your share to your ex-wife before it is sold to a third party. Otherwise, you fail as you haven’t transferred your share to your ex-partner who is still living in the house.

The other pitfall is electing another property as your main residence in the period between moving out and transferring your interest to your ex-wife. If you buy a main residence in the interim you may fail the claim under s225B.

SDLT Transfers to Limited Companies

Holding a buy to let property via a limited company can be an attractive way of holding property.  Lower rates of corporation tax and full mortgage interest deductions apply following the changes to interest relief for individual landlords.

There have been changes to stamp duty land tax and as such it has become an area that should be given more than a mere thought.  Here we are looking at the SDLT implications of property transfers in England, Northern Ireland, and Wales.  Transfers of property in Scotland will be subject to land and buildings transaction tax, and from 1 April 2018, property transfers in Wales will be subject to the land transaction tax.

Where an individual is transferring a property to a connected limited company the following should be considered:

  • The consideration is deemed to have been payable at no less than the market value of the property. The SDLT cannot be reduced if the transfer is for nil consideration or at less than market value.  There are no rules relating to gifts etc.
  • The additional rates of 3% will apply to all residential property acquisitions made by companies.
  • If the transfer to a company comprises a mixed-use property i.e. residential and commercial, then the mixed-used rates apply.
  • If two or more properties are transferred to a company, then it may be possible to make a claim for multiple dwellings relief. This relief calculates the SDLT payable by reference to the average value of the properties transferred.
  • The higher SDLT rate of 15% applies where a company acquires a single dwelling interest valued over £500,000 unless for qualifying business purposes. Relief is available where the properties are held as a buy to let investments though further SDLT may become due if there is a change of use within three years.

Based on the above a thorough review of the SDLT implications should be made before any legal or beneficial transfers of property take place as transactions of this nature can deliver surprising results!